It's Primetime for Media StocksDespite some concerns about advertising, shares near highs 2/18/2013 12:01:00 AM Eastern
As the stock market flirts with its
all-time high of 14,164.53 on the Dow
Jones Industrial Average, most media
stocks have been climbing even faster than the
Dow and are approaching record territory.
In an improving economy, the conventional
wisdom is that companies that depend on advertising
would outperform, said Brian Wieser,
analyst at Pivotal Research. That was true
in the opposite direction when the economic
crisis hit, and media stocks nose-dived and
recovered only slowly.
Last year was a great one for media stocks,
with shares of Discovery and Comcast leading
the way with gains of more than 60%. Going
forward, media stocks “can outperform the
market, they sure can. ‘Will they’ is another
question,” Wieser said.
So far this year, they continue to rise. Discovery
and Viacom have jumped more than
12%, CBS is up almost 12%, News Corp. and
Time Warner have gained 11%, Disney 10%,
Comcast 9% and Scripps Networks is plus almost
7%. Overall, the Dow is up 6%.
Rising stock prices are obviously important
to investors. They are also important to top executives
who have significant holdings and are
granted stock and options as part of their annual
compensation. Wieser also
notes that rising stock prices
create enthusiasm and momentum
that can boost the interest
of vendors and customers, such
as programmers and advertisers,
to work with the company.
The gains by media stocks
did not abate with the perception
that ad revenue growth
slowed in the fourth quarter.
“For the most part, this earnings
season has supported the
view that the media business
models may have a greater
ability to drive margins higher than many
have anticipated,” John Janedis of UBS said
in a recent research note. “For the fourth
quarter, earnings have come in better across
the board on weaker than expected revenue
from advertising and film. The good news is
that ad growth will accelerate somewhat from
4Q driven by greater volume and marginally
higher pricing exiting the quarter.”
Janedis’ top picks in the sector are Time
Warner and CBS.
Todd Juenger of research firm Sanford C.
Bernstein is also bullish. “Generally we believe
2013 ought to be another good year for the
sector,” Juenger said in a recent report. “The
same business drivers that propelled 2012 are
still in place. Affiliate fees are safe and contracted,
and cord-cutting remains a hypothesis
rather than a reality. We are cautiously
optimistic on advertising demand.”
Despite that optimism about advertising,
Juenger favors companies poised to benefit
the most from increases in affiliate fees and
international growth, and those that have the
best programming cost structure.
“Frankly, the most important item this quarter—
and every other quarter—for media companies
is: What is the state of TV advertising?
How is the demand environment holding up?
What visibility do we have? Should we be worried?
It seems like over the past year the intensity
of those questions has been
stronger than ever, given the
high level of uncertainty about
the macro environment combined
with the unprecedented
volatility of ratings,” he said.
Bernstein currently rates
Disney, News Corp. and Discovery
as “outperform” companies,
CBS and Time Warner
as “market perform” and Viacom
Earlier this month, Scripps
Networks reported slower than
expected advertising revenue,
and its stock took a quick dive. But after a reassuring
conference call, some analysts thought the
sell-off was an overreaction. In a note called “Less
Heartburn Than We First Thought,” Michael
Nathanson of Nomura Securities said that he
was leaving his target price for Scripps Network
share unchanged at $58.
Increased dividends and share buybacks
have been as big a factor in media stock gains
as advancing revenue and operational efficiency,
noted Anthony DiClemente of Barclays
Capital. “With certain media companies generating
incremental cash through the divestiture
of non-core businesses, we believe return of
capital trends could improve from here,” Di-
Clemente said. “Importantly, high-priced/dilutive
acquisitions have been scarce, an indication
of more disciplined management teams.”
Pivotal’s Wieser notes that with lots of cash
on their balance sheets and low interest rates,
media companies don’t need to rely on the
high price of their stock to make acquisitions.
And though media companies are squeezing
costs to boost profit margins, “If it’s a company
that views itself as having great growth prospects,
then retaining cash and plowing it into
the businesses is the focus,” Wieser said.